Volatility Markets Are Complacent | Kris Sidial on Tariff Risk to Stocks, Dispersion Trade, and Margin Risk
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Chris, welcome to Monetary Matters. We've got a lot to talk about. Yeah, thanks for having me. I appreciate it. Chris, what are you thinking about markets right now? The S&P is down, oh, 7%, 8% from all-time highs, and people are a little bit panicked. What are you thinking?

You and I have done podcasts before, and I think one thing with some of the research that we put out, some of the commentary that I put out, I think I always fall in line with the volatility guy who is more sensible. So usually my takes are more of a bullish stance around the fact that over an extended period of time, equities tend to go up.

I think there's a bad association with vol traders and just having this permanent bear narrative. But I think for the first time in a very long time, myself and Ambrose as a whole, for the firm, we have a bit of a bearish lean in the way how equities probably will move over the next, let's call it 12 to 18 months. And I think this is more so aligned with the stance of what this administration

what the Fed, what the administration, what the Treasury is all sort of signaling. I mean, we've had this initial reaction with equities dropping, you know, 10% over the last month. And I think if you look at vol markets, you can see that the vol market has completely disbelieved this drop. And I think you notice this from a couple of different angles. One,

one month downside vol is just not pricing in what investors would think in the case of a very

you know, very rapid declining equity market. And I think the other thing that we're seeing is a lot of interest in short-term call buying, you know, so the way how the vol surface has been moving is more indicative of people trying to call bottoms as opposed to fear that there's going to be some type of an extreme sell-off or an extended sell-off. You look at like three-month vol, six-month vol,

hedging is not really a factor, right? You've had very little elevated vol. So I think a lot of people are looking at this move as more of a correction and a short term thing that's just going to go back into the norm of markets just going straight back up. But ideally, I think for the first time in a very, very long time, there's been a structural change in the way how policy is echoed to capital markets. So

That's kind of what we're seeing out there. And obviously, there's been this whole news about like some of the multistrats taking some losses and deleveraging across long short equity hedge funds. And that's played a part. Right. But one of the biggest things that I've been trying to relate to

people is that if this was just a deleveraging from Mag7 in the US equity market, you wouldn't see cross asset implications the way how it has been moving. So you wouldn't see gold at highs like that. You wouldn't see Bitcoin getting deteriorated. Those are things that you would not commonly see if it's a very idiosyncratic one off type of market impact.

Yeah, all in all, I think the market is slowly understanding this administration is looking for that quote unquote reset. And the multi-strategy funds, those are very large volatility targeting funds that have had some losses and have de-grossed. They have very tight risk limits. You're saying that you're seeing other moves. That's what it's not just that. Chris, when you talk about the volatility markets, so it sounds like you're saying that the volatility markets are

are showing you that investors are not preparing for downside risk. They are not hedging. They are not buying puts, buying calls on the VIX. They are not basically preparing for a crash. And if investors don't prepare for a crash, does that increase the chance that a crash actually happens? It's duplicitous, right? Because

you are seeing a slight pickup in hedging, but not to the extent as to what you would generally see if the market is really in this belief that equities are going to really have a tough time over the next 12 to 18 months, or let's call it the next month. It could be a potential crash zone or something like that, which that's not what I'm calling for. I'm just saying that when equities decline,

eight percent all right to ten percent you usually see an increase in downside hedging this time there's been a slight take up an increase in downside hedging but it's this back and forth where people are saying yeah i'd rather play for a bounce i think most of the ball market has been playing for this recovery not really for this view that

This can continue a bit further down. So when you look at hedging pricing, yeah, you look at all you look at the way how vols reacted across S&P vol surface. You look at vol pricing in the VIX complex. You look at single stock vol as a outside of like the tech names. Those have been completely obliterated.

But that ball has not picked up and it's not really showcasing any type of panic or fear. I think you could look at some anecdotal things as well where

You know, when you're in these these moments of a regime shift or a crisis moment, you'll see more of a broad stroke from from more amateur investors say certain things or take an interest towards what their portfolio is doing or what the portfolio is not doing. There's really none of that that's going on. Right. The world roughly looks the same today if you compare that to four weeks ago.

right so like we're not in like a panic stage where i would think that people should be overly aggressively hedging but we we're sort of less than what you would anticipate for this type of price move in this type of forward projection especially because some of the policy reforms are pretty severe right you're talking about cutting jobs from federal workers right you're talking about large tariffs on these huge economies that the u.s

has had issues with in the past. These are big second, third, fourth order knock-on effects and big implications that these can have for capital markets. So I think

Right now, what you're seeing is people just playing for this short-term balance and not really the vol pricing that you would see if there's like a longer-term thing on the horizon. Yeah, Chris, I rarely share my own views, but I happen to share your general bearishness on the market. I think there are a lot of catalysts. The Federal Reserve meeting tomorrow, I think, could be a bloodbath. I mean, with inflation expectations where they are and inflation where it is, I just don't see how the Federal Reserve could say, oh, actually, we're going to totally cut interest rates because of tariffs.

And then the non-farm payroll that's going to release in April, the April 2nd tariff date. So I think there's a ton of reasons why the market can go down and not a ton of reasons why the market could go up.

Volatility is how much the market moves. There's realized volatility, what has actually happened, how much has the market moved, implied volatility, which is what you trade, which is an input into options. So what has the market been realizing in terms of volatility and what is priced in in terms of implied? Because even though we are at 8% down from all-time highs and it has happened somewhat quickly over one month,

Some people saying, you know, going back to 1929, it is a rather quick decline. But if you look at the intraday moves, Chris, as you obviously know, they're not that big. So 1.1% down, 1% up, 1% down. March 10th, you had a 2.7% decline. But if you're just having a 1% down move, that's a, you know, as I learned from you and other people, that just multiply by 16 to get the annualized vol. So a 1% move is just 16 volatility.

And then implied volatility should be a little bit higher and then the VIX should be a little bit higher. But that's the VIX of 20. And what the VIX right now is at 21. So doesn't that make sense? How much of a premium do you think implied volatility should be trading above realized? That's a very good point, right?

you have to look at the way how the market is moving and then compare that to what is implied vol naturally doing. But again, I think there's a bigger picture to this, right? So if you go back to certain things like certain events, like think back to April of last year where you had

you know, war going on in the Middle East and you notice this big dislocation with the way how RealizeVault versus Variance was trading, right? So really, really big difference there. There are moments where things are like that. Think back to the SVB thing back in March of 23, right? Where we had this mini banking crisis. The S&P didn't tank

you know, 10% in a day, but you saw implied to really starts to find this dislocation. So you get that disconnect between implies and realize when there is a sense of fear, when there are, when there is an understanding of longer term or bigger implications that exist in the markets. Now,

as an investor, you have to ask yourself, at what point does a 1% decline in the S&P set that type of knock-on effect off where investors start to puke up exposure and things become very fearful and panicky on the street. And with the way how exposures are in today's environment, I don't think we're too far off. So here's a couple of key pieces that investors could think about. You could say, okay,

When Trump got elected, there was a heavy rotation into U.S. equities for a very solid three months. Okay. From domestic RIAs and from foreign pensions specifically had a whole big game plan that pivoted into their playbook when the administration was in office last time around. Right. So a lot of people were very bold up that long U.S. equities are going to be the play because Trump's going to be very favorable for businesses.

Positioning was very one-sided. You had certain little data points like interactive brokers talking about they have the highest amount of margin accounts that they've ever had. Those are real things that matter because what that's showcasing is where positioning lies on the street. We went through a ton of prime brokerage data and we understood that just gross leverage and net leverage was pretty high.

across the PBs, some of the PBs that were out there that service a wide demographic of investors that range from Asian investors that invest in US stocks to European investors that invest in US stocks to US investors that invest in US stocks. So everyone was bulled up going into Trump taking office, right? Now Trump takes office and the complete opposite happens. US equities start to sell off and they grind lower and lower. To get the debt type of deleveraging out of the system,

It's not just going to be quarterly the entire way down, right? You're going to have these moments where guys are going to get tapped on the shoulder, margin rec start hitting, you know, there are second, third order effects that begin to take place from that point. So this is like one of those things where, what's the saying? I think Hemingway said it, right? Slowly, but all at once, I'm probably butchering that. But yeah, ultimately, I think that

That's kind of the playbook that this is aligning to. And then I think that you have to also think about some macro implications as well. And I know some people that follow me, they might chuckle at that because I'm like the first guy in the room to talk about trading and very anti-macro. I'm very much like...

focus on what the market's doing, trade price in front of you. And at Ambrose, we'll always do that. But our firm is just always set out to trade in that manner, right? You make a little money when markets aren't doing much and then you make a lot of money when markets volatile. But regardless, you have a trading principle. But if you actually understand a little bit about the macro landscape, again, not calling myself a macro investor because I'm far from that. I'm a trader before anything.

You have to think that this administration is talking about this big reset. They're talking about changing a lot of things. They're talking about tariffs. They're talking about immigration policy. They're talking about cutting jobs. The U.S. economy has been intertwined in this big cobweb for three decades. When you start pulling that out, there are other things that many smart people have not thought about.

that will eventually unravel. And as we wrote about in our investor letter, capital markets don't do a good job digesting that type of rapid change. So you have to ask yourself, well, if this administration is vocally trying to make these changes and they're okay with equities going lower for this reset, what does this mean for the credit market? And a lot of people will say, well,

Probably nothing. But I don't think that's true. I think that the last administration was very open with how they supported credit markets. I think that credit pricing reflected that, right? They said, well, the Fed's here to step in and save the credit market. And so is the administration. So we have nothing to fear. But I think this administration is very vocal with saying, like, there's going to need to be some failures to get this reset. And naturally speaking, you would think that would exist in the high yield credit market, right?

Right. So I think there's a lot of different moving pieces and I think ultimately it leads back to equities going lower and potentially getting harmed, not just the the Pavlov effect of just buying the dip, which has worked phenomenally well for years and years and years. And which again, like I've been the first to be like, yeah, stocks go up over time. You shouldn't fight that. But

I think it's a very unique moment and people should kind of take it as is. Yeah, I agree with you. I listened to Vice President Vance talk today about the benefits of long-term tariffs. I think

What the benefits are will be come over the next years and maybe even after the current Trump administration. I think the pain will be almost immediate from what I understand in tariffs and in sentiment. So I think people say stock market is forward looking, like when the economy was in a depression in March and April of 2020, it started in late March. It started to go up. But I think that it was pricing in very short term trends.

stimulus changes that would change the forecast immediately. I think the benefits from tariffs of, okay, Apple's going to invest $500 billion over the next four years, that's what they've said. I think that that takes a really, really long time to

to happen. And you could already it's maybe already priced in. So I think what the market cares about, which is short term economic momentum, is extremely negative. And what the market does not pay much attention to, but what the Trump administration pays a lot of attention to of the long term benefits of tariffs that the Trump administration, as the Trump administration perceives them, I think the stock market does not really care that much about it. Yeah, for sure. You know, one of my favorite courses in college

was a course on kinesiology, which is the study of human body language and certain verbiage that's used when communicating. And outside of like poker reasons, you know, trading reasons, like I love the course because I feel like I've learned so much in that course. And I think back to taking that course and some of the things I've learned, and I think when I listen to this administration talk, they are very clearly signaling a certain way, right? Which

it's been hard to get out of any type of governing body over the last four years right because the fed pal does an amazing job not signaling aggressively right he does a fantastic he's in he's a maestro with that type of stuff right he will he will very soft signal

But just like what you were talking about with like Vance, right? He was talking about like there might be some short-term pain, you know, for a longer-term gain, right? Besson's talking about this reset, right? Like every, you could quote some things from Lutnik. It just goes on and on and on, right? So it has to make you think, why is this administration so vocal about this temporary reset, right? What makes them so vocal about this? And what is everyone else missing here?

And I think if you look back historically to many market crashes, forget, forget like us market crashes. Let's talk about like,

just global, right? So we're talking about German economies, Korean economies, right? You go back 200 years and you understand like those market crashes, what you'll realize is that it kind of all starts the same with this period of like disbelief where everyone's so used to the norm that when the signs are signaling a certain way, it's just back to the status quo. And then it takes a little while for that to set in to then get that type of real selling, that real fear to pick up.

And again, I hate to sound like a perma bear or, you know, a person who's like talking their book because some people might say, well, you know, Chris, you're a vol guy. You know, you make money when vol goes up. Of course, you're going to say this type of stuff. Right. But if you completely eliminate that view and just listen to what the administration is saying and also kind of listen to like or see what's been going on in the street.

I think it's pretty clear that there are some people that have been understanding just how aggressive this administration wants to be with this reset. I don't think it's a surprise that Citadel handed back money at the end of last year. I don't think it's a surprise that some of the multistrats completely shut out. I don't think it's a surprise that there's been this back and forth in the tactical hedge fund space. I think there's just these really good antidotes that kind of line up that make you believe, well,

Some people are reading the tea leaves and they're understanding what the administration is pointing to. But then the overall market, I don't think it's fully accepted that yet. And Chris, how are you preparing for this bumpy ride that you see ahead of us? Well, you know, so what we do at Amherst is the same thing that we do every day, right? We run a carry neutral tail risk strategy, which the goal is very simple. When markets are going down and falls going up, we look to make a lot of money at once.

If there is none of that and we're in normal environments, we look to be flat. Right. So try not to lose money. So in a perfect world, we are flat during normal markets, but make a lot when things are super volatile. So for us, we don't need to pivot anything in our playbook. Last year was a good year because of one month, like August, right? August, the whole yen carry trade.

And the previous year, as we've been able to do exactly what we said we would do as well. So there's no real pivoting. I think it's just continuing to do what we do. But I think some of the things we're looking at from a research standpoint and just how we're relaying this message to investors is slightly different than what we've spoken about in the past. We sent out our most recent letter to investors saying, hey,

you know this this may not be just like a boom you make you know 200 or something in a tail strategy and that's it which is what people were so used to seeing for years right which is like you think back to 2015 right but that flash grass 2015 you think back to the ball we get it you think back to covet

it's all been just like boom boom boom you make a quick you know big return and and that month and then everything goes back to normal which is like this might be some type of you know one one year maybe a two-year period where you're gonna see more sustained volatility and not to say that there's not going to be periods where fall goes down right but it might just be something that's

very unique based on the characters that are at play. Like call a spade a spade. Trump is a chaos agent. You know, that's the type of stuff, whether you agree with his political beliefs or not, whether net and net, this is going to be a good thing for the US in over a three-year cycle or a five-year cycle. He's very aggressive and he's the guy who sits at a poker table and

forces you to go all in with him because he'll talk you and talk you and talk you in. And if he loses on the hand, right, he loses on the hand. So I think investors should be thinking more along those lines. Like, I think someone said this the other day on Twitter that I really agreed with, which is this

regime shift is going to be the regime shift back to tactical investing as opposed to how passive has dominated the last decade. Passive investing has just been like a steamroller. And I think now the tactical investors will actually end up doing really well because they'll understand that there's a bigger thing that's at play here. And there are ways to actually make money during these ups and downs.

So what do you think about the VIX term structure, like VIX futures? Where are you seeing the biggest mispricings and the biggest potentials for return? I've, as an amateur, just looked at the VIX futures curve today in preparation for this interview, and it is quite flat. Although Ben Eifert...

He did put a video on Twitter saying about how that has to do with like there being, I guess, fewer days or more days in April and June, June, July or something like that. But yeah, to my amateur eyes, it looks flat. And I know like most of the time it's upward sloping. Yeah. So Ben's talking about something that's like very esoteric and niche and only applies to like zero zero one percent of like

traders that are out there right so they'll be like rv traders so he's talking about like date like calendar days versus regular business days and you know how the holiday affects the june line so all that it is is that like the june line may look a little bit less it'll look like it has less less of a price baked into it because there's a there's an extra holiday in june right so so

That aside, just generally speaking, I do think that June vol is low in the 20s. I put a tweet out this morning because what we saw was

In the later part of last night and the early part of this morning, we had some coverage from some of the agency guys that cover some of the VIX complex. And it seemed like there was a role trade going on from a relative value in VolDesk that pushed the three front month futures down. So you had April, May, June, we're all getting pushed down into the teens. And I looked at that and I tweeted and I said, like, Vol, you know, one to three month Vol in the teens right here is a gift.

And then obviously the market sold a little bit today and you had a little bit of a spike in that. But I think if you're looking at the VIX term structure, I think it remains relatively cheap compared to what can potentially happen. You have to think about

If China puts up any type of fight, like if if Trump Trump has like 11 different games going on right now. Right. He has this thing with Canada, his thing with China, his thing with Mexico, his immigration policy. He has the whole thing with Doge cutting jobs. There's like so many things you can't even keep track of it. Right. Like now the thing with Hamas and Israel, there's so many things going on. You have to think that in order for him to like he has to be a he has to be a complete royal flush.

for this to not impact markets. And there's no chance that that's going to happen. Right. So like ultimately, even if he gets let's say he gets three out of 11 wrong, markets will still move on something like that. Right. Because these are all severe issues that have second and third order effects to them. Right. We're not talking about the Fed slowly hiking interest rates by 25 basis points. Right. And then pivoting here and pivoting there. This is a way bigger situation than something like that. So

Yeah. I mean, generally speaking, I think if you look at the vol term structure, anything in like the high teens seems relatively cheap, but I wouldn't even focus on just VIX vol. I think like S&P one year vol is quite attractive. It's like, there's no budge at all. You know, people are just so used to this view of, well, markets are going to recover and they're going to go up. You look at S&P six month vol.

you know, down 10% out the money, down 15% out the money, completely underpriced, like low teens, well not low teens, like mid-teens on some of this stuff. So I think that

Just naturally speaking, there has been no appetite to hedge any of that type of risk. And I think that if there was ever a year where that risk presented itself, it feels like this year is one of those years. And why do you think that there's such little hedging or, I guess, reverse hedging of people selling the puts instead? Like, why is the bid just not there for this protection? Because I think that people have been conditioned to...

to buy the dip and sell vol when it goes up right from a positioning standpoint that's exactly what we've continued to witness i mean you have some corporate hedgers that will come in here and there right so i don't want to make it seem like there's not been any bid involved because their hats right ball went from you know that sort of mid-teen area now to the high teen area floating in the low 20s so so naturally you get a little bit of a bid a little bit of a repricing there but for what the potential impact could be it's just non-existent and i think that you look at

investors over the last five years, they've done extremely well doing that. Every single event, if you've been able to just step in and buy the dip, you've done well. Every single event you've been able to step in and sell vault, you've done extremely well. But I think the thing that they're missing here is that this is a structural change. It has to be a real structural change because the administration is vocalizing that they are making tons of changes. So

ignoring those type of things I think could ultimately be harmful. Throughout the years, I feel like I've come across some really good Vol traders, not only friends in the space, but just people I've worked for in the past. And I think that

to be a good ball trader, you don't get stuck in this naive view of saying vol is going to always go up or vol is always going to go down. It's about understanding those moments when it's time to shift that positioning. You could be lean short vol and then you understand there is something that is materially different and you're shifting out of that risk. You're not wearing that risk, vice versa. You could be long vol and the market is telling you something else and you're

you know, laying off that risk somewhere else. So I think these are one of those moments we might look back and be like, well, it was pretty clear that the price action was materially different and the way how equities were trading was different. So that kind of was indicative that something in the vol market would be different in weeks or months to come.

Yes. And I think, Chris, that people looking at basically data going back to 2009 or even earlier when the U.S. stock market has done really well, it can be very deceiving. Like, I'm sure you've seen the posts and the tweets and the analysts on TV saying the last time the S&P did a dipped 5 percent or dipped 8 percent.

86% of the time, one year returns were very, very good. And that is true. But the future, I mean, literally, all investors and hedge funds have to tell their investors, past performance is no guarantee of future returns. Things could be totally, totally different.

Yeah, well, I could say every single time the S&P has dipped 10%, it's always been higher by 100% of the time. That's not telling you anything, right? Like that's just bad statistics and a bad understanding of non-Gaussian mathematics. So yeah, I think that it's one of those things that a lot of people have been rewarded time and time again over the last few years, buying the dip and shorting vol. And it doesn't feel like

There's a clear understanding that this administration is signaling something very different than what we've seen. You also have to think, right, for the last decade and some change, every administration that has stepped in has been very supportive to the stock market, very supportive. As a matter of fact, going back to the whole kinesiology thing, think back to one line that Trump said, we're not looking at the stock market right now.

He's never said that in his previous administration. He never said that in the whole campaign. That has always been a barometer for him. Right. So if you just want to go off of just straight logic proof, just ask yourself, why is Trump for the first time in his whole, you know, in his whole time campaigning to be president, being president and now coming back to be president?

has he started to say, we're not looking at the stock market. That means something. I think that that's pretty powerful, but I don't think that most of the investor base is looking at things like that. There was a couple of stats that came out, I think from Bank of America about hedge funds, deleveraging exposure into retail buying. I did see that chart and I did think that that was also interesting because I have some friends who are non-traders, right? Who are just

People who work in different industries like lawyers, accountants, right, who are now in their their prime years of earning power. And I think a lot of people are just so much like, oh, yeah, buy the dip. Like, you've got to buy this dip. Right. You've got to buy this dip. You've got it. You've got to get it.

And our generation has not experienced that moment of, yeah, buying the dip doesn't always work. Right. The same way how if you look back to the generation of people from 2008, there's a lot of people. It took a while to invest in the stock market because they were so scarred from 2008. They were just like, I want nothing to do with the stock market. Right. So every generation has their sort of.

their sort of moment where they they understand like how capital markets can work and how it can be beneficial and and negative and I think that that might be a learning lesson that anecdotally it seems like we might be hey yeah Chris I think buying the dip always works eventually in the same way shorting the VIX or always works eventually be like if you look at uvxy or a VIX

exchange traded product going back to eternity, like you could have short sold it for $50 billion and now it's worth $20. But there's a lot of volatility around the way and you can totally blow yourself up by shorting volatility or being very leveraged long as the asset markets

puke. I mean, Chris, so you said your fund is carry neutral tail risk. Tell us about that because when I think carry neutral, I think the ship is balanced. So the right side is your hedges. On the left side, you're funding the hedges with something because the hedges obviously cost money. So if you're buying puts, that's the thing you're preparing for a market decline. But at the same time, you're generating income at the same side, whether that's selling VIX futures or some other type of spread. So at

How do you maintain and be carry neutral now? And when you say carry neutral, maybe it doesn't mean you carry neutral every day, but it means over time you're carrying neutral. But what are you selling? How are you generating income to fund your hedges? Yeah, so that's a question that we get quite frequently. So culturally, we come from the world of prop trading. That's sort of like our bread and butter. And in the world of prop trading, a core focus is to figure out

uncorrelated ways to generate returns in markets in the shorter time horizons. So you're trying to focus on us specifically, on trading US equities and equity derivatives that have consistent edges that you can hit over and over and over in these shorter timeframes. So some people may have a

six month outlook on certain things. Some people may have a one year outlook. We tend to have days to sometimes minutes to sometimes a week or so outlook on certain things. Right. So over the years, we built up more of a quantitative framework around

certain things that we believe exist in equities and equity derivatives. So it could be big end users coming in to create these big dislocations. We could trade with that flow. Sometimes we could trade against that flow, right? If we understand that, hey, there is a huge seller or let's say a huge buyer of

These VIX futures that just come out of nowhere, right, in some line, and we're able to say this is a pretty abnormal footprint in that market. We could say, hey, dealers who then sold that are now going to go hedge and buy VIX.

tenor-adjusted VIX calls or something, right? So we can be a better buyer of that part of the term structure and make, let's call it, five basis points or so, and try to do that over and over again across a handful of different stocks, across the indices, across the VIX complex. And ultimately, if you do have edge doing those sorts of things, what you realize is that

your p&l attribution ends up flattening out because you're losing money from buying these deep out of the money tail options that you have in the book but you're making money from doing these things that have that truly have a form of edge to it and over time the two just offset right but if you're faced with an event where vol is really blowing out where like tails are you know volatility is going up markets are going down all those tail options are so convex and so asymmetric

that you could generate these really big returns from just inventorying those cheap tails so for us here's where like our book kind of works in a pretty special way

when people are selling tons of tail options, we're inventorying them for really cheap prices. Right. So like when vol is now in the 20s, we don't care to be buyers of vol because we're buying that exposure, you know, one to six month vol way in advance when people were selling it in the low teens. Right. That's the type of exposure we like to look at, the type of convexity we like to inventory. And then in the interim, whenever we see these edges exist across the equity and equity derivative market, it could be

three signals a day, four signals a day, sometimes zero signals a day. We could tap into that edge and then ultimately pay for the cost of the carry. So you say you're not buying volatility now because you already own so much of it, even though you think volatility now is underpriced? Yeah. Okay, got it. Does that often mean that like going into stock market declines, you're actually...

laying off the hedges. So you're monetizing hedges as the market goes down. Yeah, exactly. Right. So like when you get those moves where like VIX is going to 35, 40, you know, whatever, and you look at the pricing of vol and you're looking at these lines and you're like, wow, you know, somebody clearly wants to be buying this line because they're paying over the theoretical price of this option. That's the type of

moment we like to sell risk back to the market right so so it's it's sort of it's sort of like a balancing game here we want to be buying risk from the market when they don't want to to to have that right so when nobody wants insurance that's the time that we're buying it and then when everyone is desperately you know super price insensitive to buy that insurance that's when we want to sell it back to them so the game is really all about price and sensitivity right where like

there's a tail option going for, let's say, three cents and we could get it for two cents. And let's say the theoretical price of the option is, let's call it two and a half cents or something like that. We're going to buy that all day and really inventory that and keep that on our book. Because then when that option gets priced at $2 and the line is going for $2.50 by $3.50, we could go and sell it back to them. That makes sense.

What are you seeing now in terms of flows from volatility traders such as yourself, from volatility products such as ETFs and also just structural buyers and sellers of all? And also you posted something about Vanna and Volga that went way over my head. What's the what's like the hot theme in the ball space? Right. So I would say the like a big thing continues to be the dispersion trade. Right. So when I say dispersion trade,

the people are shorting index ball and they're buying ball and the names that make up the index right so you could get into clean dispersion dirty dispersion like different forms of doing this vega weighted theta weighted dispersion but that's not really important the the natural theme here is that people are buying ball on things like tesla and apple you know these like these like tech packages and they're selling index ball naturally so another reason why

You know, VIX fall has not completely exploded is because index fall has been somewhat suppressed throughout this. Right. So outside of the fact that there has been no panic, what we've noticed is that when fall goes up, you get still firepower to sell it back down. Right. Firepower to sell it back down.

And as we've seen historically, that works until it doesn't. Right. That's just the nature of how these things. Right. So then eventually one guy gets put off sides and then he completely capitulates and then you wake up and you see VIX in the 50s or something like that. Right. So dispersion trading continues to be a popular thing. Some of the exposure got hurt during the move in August of last year.

But to my understanding, most of the QIS programs that do offer these dispersion baskets have been well off. So that's a growing theme. Option selling in these ETFs, right? So these yield programs continue to be a thing. So you're seeing more people put out these type of ETFs that have these options that

you know are getting sold these short-term options you have these yield focus programs a lot of the ras are very very much attracted to these things where people sell zero dt one dt three dt seven dt and then one month right and then they just sell a slew of these these things so like there continues to be a focus around yield base option products more than anything with

most of the participants that are non-hedgers in the space.

So the dispersion trade is selling index volatility, selling index options and buying volatility on the single names. How, if anything, is that related to what is called index rebalancing? Because I know Millennium Giant Hedge Fund that actually is a so-called Paul Chop multi-strategy, they, according to Bloomberg, lost $900 million on index rebalancing in early March. Is that at all related to what you call dispersion trade?

No, no. So, so the index rebalancing thing is a little bit different, right? So sometimes names get added to the index, right? There's like 50 different ways to think about index rebalancing, by the way, but I'm just going to give a very general example for people that are listening. Let's just say there's a stock that nobody knows about. There's a company that's called ABC and over 10 years they become successful and they finally become an S and P 500 company that now needs to get added to the index.

that when that gets added to the index, there are people that have trades that could take advantage of that from many different things. The fact that it's getting added to the fact that there are big pension plans that are mandated to buy certain names and certain amounts of the index. So there's a natural inclination to drive the price of that up. Names get taken away from the index that gets sold off. So there's all sorts of ways that you could look at this. But naturally speaking, it does not have to do with

dispersion trading from an equity derivative standpoint. Okay. And then what do you say? There hasn't been that much Vanna or Volga driven profit and loss. What does that mean? When you buy an option, obviously there's a Delta, Gamma, Vega, Theta, right? So they will be your time decay. Delta is the impact that it has on the stock. Gamma is

just the interim period of when the stock is moving and the P&L that could be made there. And then Vega is the volatility, right? So in these options, there are these second and third order effects that generally don't have that much implication on someone who is a directional taker of trading options, but sometimes they do. So

as a buyer of tail options, your biggest P&L comes from vol of vol, which is vol go. So you get paid when volatility is really, really mooning. The ball surface looks super flat. People are pricing for standard deviation moves, like one standard deviation moves, right? Like that's ultimately when you get paid. So when you look at like the P&L, that P&L attribution of an option, when the option goes up or down,

You could back out to like, well, what was that effect of like Vol of Vol moving up that impacted and how rapidly is that impacting positively or decaying the option or, you know, sorry, positively or harming the option. So for in a more general way, we haven't seen a lot of Vol of Vol really pick up during this move. The tails haven't picked up. There hasn't been much panic. There hasn't been a need for

to go and hedge out margin risk. So when there's no need like that, the options don't get that, let's call it second boost. Tell me about margin risk. What do you mean? Yeah. So some people would ask, okay, well, if you guys are selling that risk back to the market, who ends up being the buyer of that, right? Who's buying that stuff?

And nobody wants to be buying like a VIX 100 call when the VIX is at like 60. In practical terms, most people would say, oh, that's silly. Like the VIX will never get there. Maybe, maybe not.

But those are usually bought to cover margin requirements, which means that you're losing money on another side of your portfolio and you're now forced to be a buyer of this thing so that the way how your prime broker or any type of collateral agreement you have, it offsets in a way that you won't completely blow up your account or your fund or strategy or something like that.

those people become forced buyers. Those people who are off-sides become forced buyers of these type of tail options that we're inventorying. And which is why, like when you look at the price that these transact for, they're transacting at massive premiums when you sell it back to the market, right? Like anytime we're selling back tails to the market, it's always going to be over some type of fair value because people are desperately in need. Same thing with like the move in August, you know, when we were selling that risk back to the market,

our Vol surface is pricing these options. I'm just using this generally speaking at like $3. Then we were selling lines for like $5, right? Like, like 550. So whenever people are offsides and they need to cover that margin requirement, they become buyers and we could sell it back. Yes. And so like a call option on the VIX, that's something that benefits from Volga because the change in implied volatility goes up as

The exposure, I guess the exposure to implied volatility changes as volatility goes up. Yeah, yeah. And so what are you seeing that now? Because I'm like, how much is that represented by VVIX, like vol of vol? Because that is such a weird looking chart over time and even more so than the VIX. But it doesn't seem like vol of vol goes up that much.

And so tell us about that effect and maybe Vivix is the wrong type of thing to look at. No, I think Vivix is actually a decent thing for some people to look at, right? Because you don't need to look for most people who are listening, who are not like volatility arbitrageurs. You don't need to focus on every single line item and every single ball pricing within that line item. It's a bit of overdrive for the general public, right? You can still make money trading derivatives without a core focus on that.

But something like VVIX, so VVIX is the same exact calculation that VIX is for the S&P. But VVIX is that for VIX, right? So as VIX tracks 23 to 37 day weighted average implied falls of VVIX,

a strip of spx options right it runs every 15 seconds the calc runs between the bit as spread and ultimately when they pick up on that calc that gives you the fixed pricing which inherently is just like a variant swap which is like an exotic structure so vbix is the same mechanical thing of doing that except they do it on the fix instead of doing it on s p options they do it on vix options

So that could be a decent way to look at vol of all for the general public, because what you can see when VVIX is really high, what that is telling you is that people are really trading VIX. They're really trying to trade these VIX options, these predominantly VIX calls.

So people are aggressively buying these VIX calls, maybe buying, maybe selling. That gets into a whole other node where you need to tag end user directionality. But that aside, you could look at that and you could say from a general stance, vol of vol is high, people are probably hedging. When that's low, I think what VVIX is at like 110 or something right now? Yeah, 100, yeah.

Okay. Yeah. So historically, right, that's more on the low range. And if you go back and you look at like some fall events, like if you look at COVID, I think, I think it COVID got to like 180, 190 or 200 or something. August of this past year, I know it got elevated. So those tell you when fall of all is really high, right? People are.

reaching for protection. Those are generally the moments where firms like us will do really well. And I guess, so what was weird to me is the VVIX, it never really, like the bottom of the VVIX is like 60. So 60 is a huge reading for the VIX, but for VVIX, like it never really gets that low because there's always, VIX can always change on a dime. Yeah. Yeah. I mean, it's just the way how they mechanically structured it. A lot of them,

Nerdy talk for that's interesting to us, but at the end, but just for people who are not volatility opportunists, which obviously I'm not either. And you are basically you're bearish and you think put options on the S&P are cheap and crash protection on the S&P is cheap. That sounds so crazy to say that I'm bearish out of all people. You know, I feel like it's just such a paradox because it's just so rare for us to have this type of view on something. But yeah, yeah.

Kind of going back to what I was saying, like, you know, we are traders before anything. Like I will never hold some type of an eye view. You know, I think if markets show me different, you know, we go to all time highs. I'm pivoting that view completely. Right. I might look back and laugh and be like, geez, you are so wrong about that view. You know, maybe we'll do like a follow up interview and laugh at it together if it's wrong. But yeah, ultimately, I think that

equities are going to have a tough year this year. I don't think it's going to be a cakewalk like what people are thinking. I think that people have been preconditioned to buy that dip and sell vol and it's worked phenomenally well over the last few years in an environment where it should have, right? Because the administration, the Fed, everyone has been supportive to U.S. equities

Even foreign policy has been supportive to US equities. You've had tons of international investors investing in US equities. So all that was a reason to be long US equities. But I think that this is one of those rare cases where structurally something is a bit different and the tactical investor will probably have a good next year and a half

But just this passive, naive way of buying stocks and stocks just going up, I think we'll have a hard time. And yeah, the case for hedging right now remains really, really cheap, as is with any type of crash. If you go back historically, it always starts like this, where it's like even even COVID people like I remember trading through COVID and like.

One thing that a lot of people forget, because it was such a compressed time, was that there was a lot of back and forth. Where fall was going up, like that third week of Feb, fall started going up, got pushed back down. Fall started going up higher, got pushed back down, fall started going up. And then when we started getting into March, I think that was...

I got to go back and check, but I think that's when we was like really crossing over 30. And even so you had people that were coming in and selling ball and there's tons of like information on why that happened now, but like people coming in, pushing the ball surface down back into the 25s and then finally, you know, ball explodes. So it's not really unconventional to see vol on the first few moves get pushed down when it, when it starts to react.

But I think ultimately, as the market understands the longer term implications of this and digest that stuff, ultimately, that could look to bigger moves in equity vol. And one final thing I want to ask you about, you said that on Twitter, a post that basically, right now, what you're seeing is when the stock market goes up, vol goes down. But when the stock market goes down, vol, it doesn't want to go up. So basically, what we're saying is that

just there's not a lot of demand for hedges. Like people are looking for any excuse to sell vol as soon as the stock market goes up and they're finding it hard to buy vol as the stock market goes down. I generally do agree with that where it's like, naturally speaking, like people are not looking for this type of hedging. And again, you could look at, you don't need to think about all these sorts of like fancy second order things. You could just look at the way how the vol term structure, sorry, vol surface has been reacting where it's like,

As we slide lower, yeah, puts are getting slightly bid, but people are also buying calls. So you have to ask yourself, like in a moment where people are panicking, they're not buying calls, right? They're not. That's not a common thing, right? So to see the vol surface shifting, especially if you look at like,

like zero DTE vol surfaces and that could be pretty wacky, right? But like if you just look at something like, you know, one standard deviation or you look at the straddle and see as vol floats and moves, just like how that vol pricing is moving, it's very clear that people are still bottom picking. Every...

I even think internally, like we are like, oh yeah, a bounce is coming soon, right? Like maybe a bounce is coming soon. So I think this view is just everyone's looking for the bounce to make money on the bounce. But I'm not too sure if people are thinking like, well, the world might look very different in three months from now because of these policy reforms. And generally speaking, that probably wouldn't be good for equities.

Yes. And I really like what you said about being willing to change your view as soon as the price action dictates otherwise. I'm going to be trying to do the same. And my read is just the stock market hates tariffs and Trump loves tariffs. And I don't think I'm going to change my mind about the second view, Trump loving tariffs. But if stock markets start going up on tariff news, I'll change my view in a few hours. And I suggest people do the same.

Chris, thank you so much for coming on Monetary Matters. Your closing thoughts with the audience. First of all, thanks so much for having me. I really appreciate it. But yeah, I think that investors should take the time to look into what this administration is saying. Take the time to dig into some of the things that Besant is specifically saying, what Nick is saying, and understand the overall sentiment that they're signaling towards.

Because ultimately, that could help them to make portfolio shifts that can net-to-net be more tactical. That could net-to-net potentially help them, right? Not just naively focusing on, you know, passively buying dip or something like that. I think ultimately what you realize is that, you know, if you make these type of good portfolio decisions early on,

You don't miss much when the move takes place, right? Like you end up coming back in at really good prices and you have the firepower to buy risk assets at discounted prices if the market does take another turn. Chris, a pleasure as always. People could find you on Twitter at KSIDIII. I am, of course, on Twitter at JackFarley96.

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